-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PrOFEvlvNa7Dux7s0MDCB1On3xwrF292JDXdSJiiUzCrf95pMebtVU7VXqMiMzkW FwDEN8ab+i4j8wbuB+9PFQ== /in/edgar/work/0001021435-00-500004/0001021435-00-500004.txt : 20001121 0001021435-00-500004.hdr.sgml : 20001121 ACCESSION NUMBER: 0001021435-00-500004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GRAPHON CORP/DE CENTRAL INDEX KEY: 0001021435 STANDARD INDUSTRIAL CLASSIFICATION: [7372 ] IRS NUMBER: 133899021 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21683 FILM NUMBER: 773446 BUSINESS ADDRESS: STREET 1: 400 COCHRANE CIRCLE CITY: MORGAN HILL STATE: CA ZIP: 95037 BUSINESS PHONE: 4082017100 MAIL ADDRESS: STREET 1: 400 COCHRANE CIRCLE CITY: MORGAN HILL STATE: CA ZIP: 95037 FORMER COMPANY: FORMER CONFORMED NAME: UNITY FIRST ACQUISITION CORP DATE OF NAME CHANGE: 19960823 10-Q 1 0001.txt GRAPHON - THIRD QUARTER 2000 FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 Commission File Number: 0-21683 ---------------------- GRAPHON CORPORATION (Exact name of Registrant as specified in its charter) ---------------------- Delaware 13-3899021 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 400 Cochrane Circle Morgan Hill, California 95037 (Address of principal executive offices) Registrant's telephone number: (408) 201-7100 ---------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] As of November 6, 2000 there were issued and outstanding 14,734,234 shares of the Registrant's Common Stock, par value $0.0001. ================================================================================ PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
GRAPHON CORPORATION BALANCE SHEETS September 30, December 31, 2000 1999 ASSETS (Unaudited) - ------ ------------ ------------ Current Assets: Cash and cash equivalents ........................ $ 6,849,900 $ 8,481,500 Available for sale securities .................... 7,906,500 2,027,600 Accounts receivable, net of allowance for doubtful accounts of $100,000 and $25,000 ...... 2,518,500 1,670,600 Prepaid expenses and other assets ................ 486,600 364,300 ------------ ------------ Total Current Assets ........................... 17,761,500 12,544,000 ------------ ------------ Property and Equipment, net ......................... 925,800 537,000 Purchased Technology, net ........................... 3,300,800 1,504,800 Capitalized Software, net ........................... 404,900 221,800 Patent, net ......................................... 381,700 400,000 Long Term Investment - Related Party ................ 1,334,400 -- Other Assets ........................................ 230,200 16,700 ------------ ------------ TOTAL ASSETS ................................... $ 24,339,300 $ 15,224,300 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable ................................. $ 385,300 $ 259,700 Accrued expenses ................................. 1,180,700 464,000 Note Payable ..................................... 156,200 -- Deferred revenue ................................. 334,400 119,000 ------------ ------------ Total Current Liabilities ...................... 2,056,600 842,700 ------------ ------------ Commitments and Contingencies (note 5) Stockholders' Equity: Preferred stock, $0.01 par value, 5,000,000 shares authorized, no shares issued and outstanding -- -- Common stock, $0.0001 par value, 45,000,000 shares authorized, 14,658,870 and 12,342,322 shares issued and outstanding .................. 1,500 1,200 Additional paid in capital ....................... 38,289,700 25,413,500 Deferred Compensation ............................ (1,018,800) (1,472,100) Accumulated other comprehensive income ........... 100 (4,400) Accumulated deficit .............................. (14,989,800) (9,556,600) ------------ ------------ Total Stockholders' Equity ..................... 22,282,700 14,381,600 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..... $ 24,339,300 $ 15,224,300 ============ ============
See accompanying notes to financial statements.
GRAPHON CORPORATION STATEMENTS OF OPERATIONS Three Months Ended Nine Months Ended SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 2000 1999 2000 1999 (Unaudited) (Unaudited) (Unaudited) (Unaudited) --------- --------- --------- --------- Revenues $2,382,500 $502,600 $4,226,700 $1,849,500 Revenues - related party 350,000 600,000 2,150,000 600,000 --------- --------- --------- --------- Total Revenues 2,732,500 1,102,600 6,376,700 2,449,500 --------- --------- --------- --------- Cost of revenues 255,000 815,300 604,600 2,576,200 Cost of revenues - related party 21,900 58,300 95,800 58,300 --------- --------- --------- --------- Total Cost of Revenues 276,900 873,600 700,400 2,634,500 --------- --------- --------- --------- Gross Profit (Loss) 2,455,600 229,000 5,676,300 (185,000) --------- --------- --------- --------- Operating Expenses: Selling and marketing 1,388,100 783,800 4,169,600 2,359,200 General and administrative 1,150,600 559,200 3,022,400 1,381,500 Research and development 1,195,600 517,000 2,658,100 1,771,800 --------- --------- --------- --------- Total Operating Expenses 3,734,300 1,860,000 9,850,100 5,512,500 --------- --------- --------- --------- Loss From Operations (1,278,700) (1,631,000) (4,173,800) (5,697,500) --------- --------- --------- --------- Other Income (Expense): Interest & Other Income 255,400 49,900 907,000 76,900 Interest & Other Expense - (1,700) - (9,100) Loss on Long Term Investment- Related Party (1,012,800) - (2,165,600) - --------- --------- --------- --------- Total Other Income (Expense) (757,400) 48,200 (1,258,600) 67,800 --------- --------- --------- --------- Loss Before Provision for Income Taxes (2,036,100) (1,582,800) (5,432,400) (5,629,700) --------- --------- --------- --------- Provision for Income Taxes (17,000) - 800 800 --------- --------- --------- --------- Net Loss $(2,019,100) $(1,582,800) $(5,433,200) $(5,630,500) ========= ========= ========= ========= Basic and Diluted Loss per Common Share $(0.14) $(0.15) $(0.38) $(0.59) ========= ========= ========= ========= Weighted Average Common Shares Outstanding 14,651,037 10,712,629 14,394,263 9,540,148 ========== ========== ========== =========
See accompanying notes to financial statements.
GRAPHON CORPORATION STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 2000 1999 (Unaudited) (Unaudited) ----------- ----------- Cash Flows From Operating Activities: Net loss $(5,433,200) $(5,630,500) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 857,100 2,473,900 Loss on Disposal of Fixed Assets 12,900 - Amortization of deferred compensation 1,081,600 125,200 Provision for doubtful accounts 75,000 - Loss on Long Term Investment - Related Party 2,165,600 - Changes in operating assets and liabilities: Accounts receivable (922,900) (758,100) Prepaid expenses and other assets (335,800) (522,000) Accounts payable 125,600 266,300 Accrued expenses 716,700 (4,400) Deferred revenue 215,400 (37,200) ---------- ---------- Net Cash Used In Operating Activities (1,442,000) (4,086,800) ---------- ---------- Cash Flows From Investing Activities: Purchase of available-for-sale securities (6,411,100) (1,000,600) Proceeds from sale of available-for-sale securities 537,400 1,900 Capitalization of software development costs (343,400) - Capital expenditures (606,600) (412,100) Purchase of technology (2,270,000) - Investment in Related Party (3,500,000) - ---------- ---------- Net Cash Used In Investing Activities (12,593,700) (1,410,800) ---------- ---------- Cash Flows From Financing Activities: Repayment of convertible note payable - (475,000) Proceeds from note payable 156,200 - Net proceeds from issuance of common stock 12,248,200 6,975,100 Purchase and retirement of common stock - (5,700) ---------- ---------- Net Cash Provided By Financing Activities 12,404,400 6,494,400 ---------- ---------- Effect of exchange rate fluctuations on cash and Cash equivalents (300) - Net Increase (Decrease) in Cash and Cash Equivalents (1,631,600) 996,800 ---------- ---------- Cash and Cash Equivalents, beginning of period 8,481,500 1,798,400 ---------- ---------- Cash and Cash Equivalents, end of period 6,849,900 2,795,200 ========== ==========
Supplemental Disclosure of Cash Flow Information: We paid interest expense of $2,400 and $7,800 and income tax of $800 and $800 during the nine-month periods ended September 30, 2000 and September 30, 1999, respectively. See accompanying notes to financial statements.
GRAPHON CORPORATION STATEMENT OF SHAREHOLDER'S EQUITY Additional Common Stock Paid Deferred Comprehensive Accumulated Shares Amount in Capital Compensation Loss Deficit Total ---------- ------ ----------- ----------- ------- ----------- ----------- Balances, December 31, 1999 12,342,322 $1,200 $25,413,500 $(1,472,100) $(4,400) $(9,556,600) $14,381,600 - ---------------- ---------- ------ ----------- ----------- ------- ----------- ----------- The following information is unaudited: Issuance of common stock due to the exercise of warrants and underwriter units, net of costs of $167,600 2,273,156 300 12,171,100 12,171,400 Deferred Compensation Related to stock options 313,600 (313,600) Amortization of deferred compensation 335,500 335,500 Change in market value of Available-for-sale securities (20,500) (20,500) Net loss (1,174,300) (1,174,300) - ------------------------ ---------- ------ ----------- ----------- ------- ----------- ----------- Balances, March 31, 2000 14,615,478 1,500 37,898,200 (1,450,200) (24,900) (10,730,900) 25,888,200 - ------------------------ ---------- ------ ----------- ----------- ------- ----------- ----------- Issuance of common stock due to the exercise of options and underwriter units, net of costs of $3,700 29,928 59,500 59,500 Deferred Compensation Related to stock options Amortization of deferred compensation 349,700 349,700 Change in market value of Available-for-sale securities 3,200 3,200 Net loss (2,239,800) (2,239,800) - ------------------------ ---------- ------ ----------- ----------- ------- ----------- ----------- Balances, June 30, 2000 14,645,406 $1,500 $37,957,700 $(1,100,500) $(21,700) $(12,970,700) $23,866,300 - ------------------------ ---------- ------ ----------- ----------- ------- ----------- ----------- Issuance of common stock due to the exercise of options and underwriter units, net of costs of $6,500 13,464 17,300 17,300 Deferred Compensation Related to stock options 314,700 (314,700) Amortization of deferred compensation 396,400 396,400 Change in market value of Available-for-sale securities 21,800 21,800 Net loss (2,019,100) (2,019,100) - ------------------------ ---------- ------ ----------- ----------- ------- ----------- ----------- Balances, Sept. 30, 2000 14,658,870 $1,500 $38,289,700 $(1,018,800) $100 $(14,989,800) $22,282,700 ======================== ========== ====== =========== =========== ======= =========== ===========
See accompanying notes to financial statements. GRAPHON CORPORATION NOTES TO FINANCIAL STATEMENTS 1. MERGER WITH UNITY FIRST ACQUISITION CORP. AND BASIS OF PRESENTATION On July 12, 1999, GraphOn Corporation, a California corporation ("GraphOn-CA"), merged with and into Unity First Acquisition Corp., a Delaware corporation ("Unity"). Unity, as the surviving entity to the merger and the Registrant, then changed its name to GraphOn Corporation ("GraphOn"), and the GraphOn-CA management team continued in their existing roles at GraphOn. Pursuant to the merger, each outstanding share of GraphOn-CA common stock was exchanged for 0.5576 shares of Unity common stock and each outstanding option and warrant to purchase one share of GraphOn-CA common stock was exchanged for one option or warrant, as the case may be, to purchase 0.5576 shares of Unity common stock. Additionally, GraphOn received $5,425,000 in cash that had been placed into trust upon Unity's initial public offering in November 1996 and released from trust upon consummation of the merger. As of July 12, 1999, GraphOn-CA had outstanding 16,296,559 shares of common stock. As a result of the merger, the GraphOn-CA shareholders acquired 9,086,961 shares of Unity common stock, or approximately 82.9% of the then outstanding Unity common stock. The merger was accounted for as a capital transaction which is equivalent to the issuance of stock by GraphOn-CA for Unity's net monetary assets of approximately $5,425,000, accompanied by a recapitalization of GraphOn-CA. The unaudited historical financial statements of GraphOn included herein have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of GraphOn results of operations, financial position and cash flows. The unaudited financial statements included herein reflect all adjustments (which include only normal, recurring adjustments), which are, in the opinion of management, necessary to state fairly the results for the periods presented. The results for the three and nine months ended September 30, 2000 are not necessarily indicative of the results expected for the full fiscal year. Certain amounts in the 1999 financial statements have been reclassified to conform to the 2000 presentation. 2. EARNINGS PER SHARE Basic earnings per share are calculated using the weighted average number of shares outstanding during the period. Dilutive earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the dilutive effect of outstanding stock options and warrants using the "treasury stock" method and are not included since they are antidilutive. As noted above, in July 1999, GraphOn-CA merged with and into Unity. All references to share and per-share data for all periods presented have been adjusted to give effect to the .5576 exchange of GraphOn-CA stock (See Note 1). 3. STOCKHOLDERS' EQUITY During the three and nine months ended September 30, 2000, a total of 13,283 and 92,428 shares, respectively, of common stock, totaling $17,000 and $188,400, respectively, were issued to employees pursuant to the exercise by those employees of stock options granted under the GraphOn 1998 stock option plan. Additionally, during the three and nine months ended September 30, 2000, we issued 181 and 2,224,120 shares, respectively, of our common stock in connection with the exercise of warrants and underwriter's units, resulting in net cash proceeds of $300 and $12,059,800, respectively. 4. INVESTMENTS IN JOINT VENTURE Investments in our China Joint Venture are accounted for by using the equity method, under which our share of earnings (loss) from the joint venture is reflected as income earned (lost) and dividends are credited against the investment in the joint venture as received. 5. LITIGATION In late 1996, pursuant to a non-disclosure agreement, we disclosed aspects of our proprietary technology on a confidential basis to Insignia Solutions plc, some of whose assets were later acquired by Citrix Systems, Inc. and Citrix Systems UK, LTD. When we learned of that acquisition in January 1998, we made inquiry of Insignia Solutions seeking assurances that there had been no potential misuse of our confidential information. On November 23, 1998, Citrix Systems, Inc. instituted litigation in the United States District Court for the Southern District of Florida seeking a judicial declaration that it had not misappropriated or infringed upon our proprietary technology or breached the non-disclosure agreement. We responded by filing a motion to dismiss the action for lack of jurisdiction. On May 14, 1999, the court granted our motion to dismiss the case. Citrix Systems, Inc. has appealed the dismissal of its case to the United States Court of Appeals for the Eleventh Circuit, where the matter has been argued and is awaiting decision. On October 4, 1999, Insignia Solutions filed a verified complaint against us, Citrix Systems, Inc. and Citrix Systems UK, LTD. in the Superior Court of the State of California, Santa Clara County. Their complaint alleges that we had attempted to interfere with their sale to Citrix Systems, Inc. and Citrix System UK, LTD., on February 5, 1998, of assets relating to, among other things, their NTRIGUE software product line. The complaint alleges that, as a result of such efforts, they were required by Citrix Systems Inc. and Citrix Systems UK, LTD. to place $8.75 million in escrow for potential claims by us of proprietary rights in the assets being sold. The complaint seeks unspecified general and punitive damages. On December 13, 1999 we filed an answer denying the material allegations in their complaint, and on May 10, 2000, the court granted our motion for judgment on the pleadings and dismissed their fifth cause of action against us for bad faith claim of misappropriation of trade secrets. On March 14, 2000, we filed a complaint in the Superior Court of Santa Clara County, State of California, alleging misappropriation, unfair competition, and breach of contract against Insignia Solutions and alleging misappropriation and unfair competition against Citrix Systems, Inc. On March 30, 2000, we filed an amended complaint alleging trade secret misappropriation and unfair competition against Citrix Systems, Inc. and Citrix Systems UK, LTD. and alleging trade secret misappropriation, breach of contract, fraud and unfair competition against Insignia Solutions. The complaint alleges that Insignia Solutions improperly disclosed our proprietary technology to Citrix Systems, Inc. and Citrix Systems UK, LTD., thereby, among other things, breaching Insignia Solutions' covenants not to disclose our trade secrets. The complaint also alleges that Citrix Systems, Inc. and Citrix Systems UK, LTD. improperly acquired and incorporated our proprietary technology into their products and that they knew or should have known that the technology they purchased from Insignia Solutions was our proprietary technology. The complaint seeks unspecified compensatory and exemplary damages from Citrix Systems, Inc., Citrix Systems UK, LTD., and Insignia Solutions. On September 6, 2000, Insignia Solutions amended its complaint in the Superior Court of the State of California, Santa Clara County against us, and omitted its previous claims against Citrix Systems, Inc and Citrix Systems UK, LTD. Insignia Solutions alleges that we attempted to interfere and did intentionally interfere with the sales of assets between them and Citrix Systems, Inc. and Citrix Systems UK, LTD. The amended complaint alleges that, as a result of such efforts, they were required by Citrix Systems, Inc. and Citrix Systems UK, LTD. to place $8.75 million in escrow for any potential claims by us of proprietary rights in the assets being sold. The amended complaint also alleges that we engaged in unfair competition by resurrecting stale claims of trade secret misappropriation by them. The amended complaint seeks unspecified general and punitive damages, as well as restitution and an injunction. On September 11, 2000, we filed in the Superior Court of the State of California, Santa Clara County a cross-complaint against Citrix Systems, Inc. and Citrix Systems UK, LTD. for unfair competition and a declaratory relief for comparative indemnity from Citrix Systems, Inc. and Citrix Systems UK, LTD. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FORWARD-LOOKING STATEMENTS The following discussion of the financial condition and results of operations of GraphOn Corporation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under "Risk Factors" elsewhere in this Quarterly Report and in other documents we filed with the Securities and Exchange Commission. OVERVIEW We develop, market, sell and support server-based software that is designed to enable a diverse range of desktop computers to access server-based Windows and UNIX applications from any location, over fast or slow Internet connections. Our powerful and innovative software is creating an important paradigm shift in how software is used. Utilizing our server-based architecture, organizations can instantly provide web-based access to Windows, UNIX, and Linux applications from anywhere in the world, because our technology allows universal access to software regardless of the operating system, organizations are now free from frequent and costly hardware and software updates. We believe that this provides a significant advantage for our customers. Independent software vendors (ISVs) can web-enable their applications while retaining the rich look and feel that their customers expect to see. Organizations can provide easy access to their own enterprise applications over the corporate intranet with web browsers. Applications service providers (ASPs) can serve up applications to their users regardless of display device and data connection. In the fourth quarter of 1999, we introduced Bridges for Windows, which expanded our web-enabling solution beyond the UNIX and Linux world to include the much larger Windows market as well. RESULTS OF OPERATIONS FOR THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 VERSUS THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 REVENUES Total revenues for the three-month period ended September 30, 2000 increased by $1,629,900, or 148%, to $2,732,500 from $1,102,600 for the same period in 1999. Revenues for the nine-month period ended September 30, 2000 increased by $3,927,200, or 160%, to $6,376,700 from $2,449,500 for the same period in 1999. The increase for the three-month period ended September 30, 2000 was primarily due to a $1,845,000 increase in licensing fees, which were offset by a $250,000 decrease in Revenues-Related Party. The increase for the nine-month period ended September 30, 2000 was primarily due to an increase in Revenues-Related Party ($1,550,000), and increased licensing fees ($2,307,000). A substantial portion of the increase in licensing fees for the three months and nine months ended September 30, 2000 was derived from an increase in product offerings, such as Bridges for Windows, and the licensing of Bridges for Windows technology, which became available during 2000. Currently, the licensing fees for Bridges for Windows and Bridges for Windows technology are primarily derived from a limited number of customers, which vary from quarter to quarter. All Revenues-Related Party for the three and nine-month periods ended September 30, 2000 represent licensing fees derived from our China Joint Venture. We derived no licensing fees from our China Joint Venture during the three and nine-month periods ended September 30, 1999 since our China Joint Venture did not begin operations until March 2000. All Revenues-Related Party for the three and nine-month periods ended September 30, 1999 represent licensing fees derived from Corel Corporation. We derived no licensing fees from Corel Corporation during the three and nine-month periods ended September 30, 2000. COST OF REVENUES Cost of revenues for the three-month period ended September 30, 2000 decreased by $596,700, or 68%, to $276,900, from $873,600 for the same period in 1999. Cost of revenues for the nine-month period ended September 30, 2000 decreased by $1,934,100, or 73%, to $700,400, from $2,634,500 for the same period in 1999. The decrease for both the three-month and the nine-month periods was principally due to decreased amounts of purchased technology amortization being charged to cost of revenues. Various purchased technologies became fully depreciated during 1999. SALES AND MARKETING EXPENSES Sales and marketing expenses for the three-month period ended September 30, 2000 increased by $604,300, or 77%, to $1,388,100 from $783,800 for the same period in 1999. Sales and marketing expenses for the nine-month period ended September 30, 2000 increased by $1,810,400, or 77%, to $4,169,600 from $2,359,200 for the same period in 1999. Sales and marketing expenses primarily consist of salaries, sales commissions, travel expenses, trade show related activities, promotional, and advertising costs. The increase was primarily due to increases in trade show, promotional and public relations activities as well as increased commissions and the amortization of non-cash compensation. GENERAL AND ADMINISTRATIVE General and administrative expenses for the three-month period ended September 30, 2000 increased by $591,400, or 106%, to $1,150,600 from $559,200 for the same period in 1999. General and administrative expenses for the nine-month period ended September 30, 2000 increased by $1,640,900, or 119%, to $3,022,400 from $1,381,500 for the same period in 1999. General and administrative expenses primarily consist of salaries, legal and professional services, and bad debt expense. In addition, our corporate rent, utilities and administrative employee benefits are included in general and administrative expenses. The increases for the three and nine month periods ended September 30, 2000 were primarily due to increases in legal fees in connection with ongoing litigation, in accounting and SEC filing fess in connection with our listing on the Nasdaq National Market, and the accrual of various employee expenses including bonuses and amounts payable under the employee stock purchase plan adopted at the annual shareholders meeting. RESEARCH AND DEVELOPMENT Research and development expenses for the three-month period ended September 30, 2000 increased by $678,600, or 131%, to $1,195,600 from $517,000 for the same period in 1999. Research and development expenses for the nine-month period ended September 30, 2000 increased by $886,300, or 50%, to $2,658,100 from $1,771,800 for the same period in 1999. Research and development expenses consist primarily of salaries and benefits paid to software engineers, supplies, payments to contract programmers, rent on facilities, and Internet access charges. The increase in research and development expenses for the three and nine-month period ended September 30, 2000 was primarily due to an increase in allocated rent expense due to the move of our corporate offices, and increased consulting and contractor fees as we continually strive to enhance our product line. INTEREST AND OTHER INCOME Interest and other income for the three-month period ended September 30, 2000 increased by $205,500, or 412%, to $255,400 from $49,900 for the same period during 1999. Interest and other income for the nine-month period ended September 30, 2000 increased by $830,100, or 1,079%, to $907,000 from $76,900 for the same period during 1999. Interest and other income consists primarily of interest income on excess cash, and interest and dividend income on available-for-sale securities. The primary reason for the three-month and nine-month increases was the interest and dividend income earned on substantially higher amounts of excess cash and available-for-sale securities on-hand during 2000 as compared with 1999. A one-time relocation assistance payment of $85,000 received from the City of Campbell, CA in conjunction with our move to Morgan Hill, CA also contributed to the increase. LOSS ON LONG TERM INVESTMENTS - RELATED PARTY Loss on Long-Term Investment - Related Party for the three-month and nine-month periods ended September 30, 2000 was $1,012,800 and $2,165,600, respectively, as compared with $0 and $0, respectively for the same periods during 1999. These losses reflect our decision to reclassify as expense certain technology acquired by the China Joint Venture based upon our determination that such acquired technology represents in-process research and development, which should have been expensed at the date of acquisition. As a consequence, our previously announced losses for the three-month and nine-month periods ended September 30, 2000 have been increased by $224,000 ($0.02 per common share) and $897,200 ($0.06 per common share), respectively and we will restate our financial statements for each of the three month periods ended March 31, 2000 and June 30, 2000 to reflect increased quarterly losses of $194,500 ($0.01 per common share) and $478,700 ($0.03 per common share), respectively. NET LOSS As a result of the foregoing items, net loss for the three month period ended September 30, 2000 was $2,019,100, an increase of $436,300 or 28%, from a net loss of $1,582,800 for the same period during 1999. The net loss for the nine-month period ended September 30, 2000 was $5,433,200, a decrease of $197,300, or 4%, from a net loss of $5,630,500 for the same period during 1999. LIQUIDITY AND CAPITAL RESOURCES In September 1998, we commenced a private placement of shares of our common stock and warrants. In January 1999, a convertible note in the amount of $475,000 was repaid from the net proceeds of the final closing of this private placement of securities whereby we received additional net proceeds of $1,708,600 in consideration of 1,095,053 shares of our common stock and warrants to purchase an additional 219,010 shares of our common stock. In February 1999, we sold 62,525 shares of our common stock and warrants to purchase an additional 676 shares of our common stock, for gross proceeds of $97,200. On July 12, 1999, we completed a merger with Unity First Acquisition Corp. pursuant to which each share of our common stock was exchanged for 0.5576 shares of Unity common stock and each outstanding option and warrant to purchase our common stock was exchanged for one option or warrant, as the case may be, to purchase 0.5576 shares of Unity common stock. The transaction was a forward merger with Unity surviving the merger and changing its name to GraphOn Corporation and with GraphOn's management team continuing in their existing roles. The merger provided us with $5,425,000 in net cash proceeds, which was previously held in trust for Unity until it consummated a merger with an operating business. In December 1999, we issued 1,353,028 shares of our common stock in connection with the exercise of underwriter units and warrants, resulting in net cash proceeds of $8,402,000. During the nine-month period ended September 30, 2000, we issued 2,316,548 shares of our common stock in connection with the exercise of options, underwriter units and warrants, resulting in net cash proceeds of $12,248,200. Accounts receivable as of September 30, 2000 increased, net of the Allowance for Doubtful Accounts, by $847,900, or 51%, to $2,518,500 from $1,670,600 as of December 31, 1999. The primary reason for the increase is due to the nature of our OEM licensing royalty agreements whereby the royalty payments generally are not due until 30 days after the quarter end. As of September 30, 2000, accounts receivable were $1,850,000 and $768,500 from related and unrelated parties, respectively, against which we have recorded reserves of $100,000. Subsequent to September 30, 2000, we received all amounts due under accounts receivable from related parties. As of September 30, 2000, capitalized software, net of amortization, increased by $183,100, or 83%, to $404,900 from $221,800 as of December 31, 1999. This increase represents capitalized software engineering costs, net of costs amortized to cost of revenues, which were incurred by us, substantially during the first quarter of 2000, during the production phase of readying our Bridges for Windows product for market. Once we began shipping Bridges for Windows, towards the end of the first quarter 2000, we discontinued capitalizing software engineering costs, and resumed charging those costs directly to expense (research and development) in accordance with generally accepted accounting principles. The balance in capitalized software as of September 30, 2000, represents the unamortized portion of capitalized software engineering costs and is generally amortized over a three-year period. In March, 2000 we funded our China Joint Venture with $3,500,000. Long-term investments-related party represents our initial investment, offset by the recognition of our share of the China Joint Venture's operations for the nine-month period ended September 30, 2000. Accounts payable and accrued expenses as of September 30, 2000 increased by $842,300, or 116%, to $1,566,000 from $723,700 as of December 31, 1999. The main reasons for the increase were accrued employee expenses, including bonuses and amounts payable under the employee stock purchase plan approved at the annual shareholders meeting. Additionally, accrued legal fees associated with our on-going litigation and legal, accounting and SEC filing fees in conjunction with our listing on the Nasdaq National Market have increased significantly over year-end levels. During the three-month period ended September 30, 2000, we entered into a short-term financing agreement for certain insurance policies. Notes Payable, as of the balance sheet date reflects the outstanding principal amount due under the term of the note, which matures during the second quarter of 2001. As of September 30, 2000, we had cash and cash equivalents of $6,849,900 as well as $7,906,500 in available-for-sale securities compared to total liabilities of $1,722,200, exclusive of deferred revenue of $334,400. We anticipate that cash balances as of September 30, 2000, as well as anticipated revenue from operations, will be sufficient to meet our working capital and capital expenditure needs through the next twelve months. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS In February 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 132, "EMPLOYER'S DISCLOSURE ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS," which standardizes the disclosure requirements for pension and other post-retirement benefits. The adoption of SFAS No. 132 did not impact our disclosures. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133, as amended by SFAS Nos. 137 and 138, requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS No. 133, as amended, is effective for all fiscal years beginning after June 15, 2000. Historically, we have not entered into derivative contracts either to hedge existing risks or for speculative purposes. Accordingly, we do not expect adoption of the new standard to have a material impact on our results of operations, financial position or cash flows. RECENTLY ISSUED ACCOUNTING STANDARDS AND PRONOUNCEMENTS NOT YET ADOPTED In December 1999, the Staff Accounting Bulletin (SAB) No. 101 was released which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements. Management believes that the guidance will not materially impact our disclosures. RISK FACTORS The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us, or risks that we do not consider significant, may also impair our business. This document also contains forward-looking statements that involve risks and uncertainties, and actual results may differ materially from the results we discuss in the forward-looking statements. If any of the following risks actually occur, they could have a severe negative impact on our financial results and stock price. WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT THESE LOSSES TO CONTINUE AND INCREASE, AT LEAST FOR THE NEAR FUTURE We have experienced significant losses since we began operations. We expect to continue to incur significant losses for the foreseeable future. We incurred net losses of approximately $2,019,100 and $5,433,200 for the three and nine months ended September 30, 2000, respectively, and net losses of $1,582,800 and $5,630,500 for the three and nine months ended September 30, 1999, respectively. We expect our expenses to increase as we expand our business but cannot assure you that our revenues will increase as a result of increased spending. If revenues grow more slowly than anticipated, or if operating expenses exceed expectations, we may not become profitable. Even if we become profitable, we may be unable to sustain profitability. OUR OPERATING RESULTS IN ONE OR MORE FUTURE PERIODS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY AND MAY FAIL TO MEET OR EXCEED THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS Our operating results are likely to fluctuate significantly in the future on a quarterly and on an annual basis due to a number of factors, many of which are outside our control. Factors that could cause our revenues to fluctuate include the following: o the degree of success of new products; o variations in the timing of and shipments of our products; o variations in the size of orders by our customers; o increased competition; o the proportion of overall revenues derived from different sales channels such as distributors, OEMs and others; o changes in our pricing policies or those of our competitors; o the financial stability of major customers; o new product introductions or enhancements by us or by competitors; o delays in the introduction of products or product enhancements by us or by competitors; o any changes in operating expenses; and o general economic conditions and economic conditions specific to the software industry. In addition, our royalty and license revenues are impacted by fluctuations in OEM licensing activity from quarter to quarter, which may involve one-time royalty payments and license fees. Our expense levels are based, in part, on expected future orders and sales. Therefore, if orders and sales levels are below expectations, our operating results are likely to be materially adversely affected. Additionally, because a significant portion of our expenses is fixed, a reduction in sales levels may disproportionately affect our net income. Also, we may reduce prices or increase spending in response to competition or to pursue new market opportunities. Because of these factors, our operating results in one or more future periods may fail to meet or exceed the expectations of securities analysts or investors. In that event, the trading price of our common stock would likely decline. OUR FAILURE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS MAY ADVERSELY AFFECT US Our commercial success is dependent, in large part, upon our ability to protect our proprietary rights. We rely on a combination of patent, copyright and trademark laws, and on trade secrets and confidentiality provisions and other contractual provisions to protect our proprietary rights. These measures afford only limited protection. We cannot assure you that measures we have taken will be adequate to protect us from misappropriation or infringement of our intellectual property. Despite our efforts to protect proprietary rights, it may be possible for unauthorized third parties to copy aspects of our products or obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries do not protect our intellectual property rights as fully as do the laws of the United States. Furthermore, we cannot assure you that the existence of any proprietary rights will prevent the development of competitive products. The infringement upon or loss of any proprietary rights, or the development of competitive products despite such proprietary rights, could have a material adverse effect on our business. WE FACE RISKS OF CLAIMS FROM THIRD PARTIES FOR INTELLECTUAL PROPERTY INFRINGEMENT THAT COULD ADVERSELY AFFECT OUR BUSINESS At any time, we may receive communications from third parties asserting that features or content of our products may infringe upon their intellectual property rights. Any such claims, with or without merit, and regardless of their outcome, may be time consuming and costly to defend. We may not have sufficient resources to defend such claims and they could divert management's attention and resources, cause product shipment delays or require us to enter into new royalty or licensing agreements. New royalty or licensing agreements may not be available on beneficial terms, and may not be available at all. If a successful infringement claim is brought against us and we fail to license the infringed or similar technology, our business could be materially adversely affected. OUR BUSINESS SIGNIFICANTLY BENEFITS FROM STRATEGIC RELATIONSHIPS AND THERE CAN BE NO ASSURANCE THAT SUCH RELATIONSHIPS WILL CONTINUE IN THE FUTURE Our business and strategy relies to a significant extent on our strategic relationships with other companies. There is no assurance that we will be able to maintain or develop any of these relationships or to replace them in the event any of these relationships are terminated. In addition, any failure to renew or extend any licenses between any third party and us may adversely affect our business. BECAUSE OUR MARKET IS NEW AND EMERGING, WE CANNOT ACCURATELY PREDICT ITS FUTURE GROWTH RATE OR ITS ULTIMATE SIZE, AND WIDESPREAD ACCEPTANCE OF OUR PRODUCTS IS UNCERTAIN The market for server-based software, which enables programs to be accessed and run with minimal memory resident on a desktop computer or remote user device, still is emerging, and we cannot assure you that our products will receive broad-based market acceptance or that this market will continue to grow. Additionally, we cannot accurately predict our market's future growth rate or its ultimate size. Even if server-based software products achieve market acceptance and the market for these products grows, we cannot assure you that we will have a significant share of that market. If we fail to achieve a significant share of the server-based software market or if such market does not grow as anticipated, our business, results of operations and financial condition may be adversely affected. WE RELY ON INDIRECT DISTRIBUTION CHANNELS FOR OUR PRODUCTS AND MAY NOT BE ABLE TO RETAIN EXISTING RESELLER RELATIONSHIPS OR TO DEVELOP NEW RESELLER RELATIONSHIPS Our products primarily are sold through several distribution channels. An integral part of our strategy is to strengthen our relationships with resellers such as value-added resellers, distributors, OEMs, systems integrators and other vendors to encourage these parties to recommend or distribute our products and to add resellers both domestically and internationally. We currently invest in and intend to continue to invest significant resources to expand our sales and marketing capabilities. We cannot assure you that we will be able to attract and/or retain resellers to market our products effectively. Our inability to attract resellers and the loss of any current reseller relationships could have a material adverse effect on our business, results of operations and financial condition. Additionally, we cannot assure you that resellers will devote enough resources to provide effective sales and marketing support to our products. THE BANKRUPTCY ON NOVEMBER 15, 1991 OF A PREDECESSOR COMPANY MAY EXPOSE US TO CREDITORS' CLAIMS OF UP TO $2.23 MILLION AND INTEREST, IF ANY On November 15, 1991, GraphOn-CA filed for reorganization under Chapter 11 of the United States Bankruptcy Code and, later, submitted a Debtor's Proposed Amended Plan of Reorganization. The plan was confirmed by order of the bankruptcy court on July 11, 1994 and the court established a plan of payment for the benefit of our creditors. Under the bankruptcy court order, we established a disbursement account into which 50% of the ongoing terminal royalties we receive from OEMs with whom we had a current relationship must be deposited to pay named creditors. For all but one unsecured creditor, payments from the disbursement account were ordered to continue up to the earlier of: o the limit of our liability to each unsecured creditor; or o through the year 2000. However, the largest unsecured creditor's claim, which currently totals approximately $964,000, must be paid from available funds, if any, in the disbursement account until such amount is fully paid. Our total remaining liability under the bankruptcy, as of September 30, 2000, is limited to the lesser of: o approximately $2,230,000; or o 50% of future ongoing terminal royalties we receive from the OEMs. To date, only royalties received pursuant to some of our license agreements existing at the time of the bankruptcy have been deposited into the disbursement account, and we have not deposited into such account or paid creditors out of royalties received or currently received on our subsequently developed and licensed server-based technology. We believe that our royalty payment obligations under the bankruptcy court order relate only to licenses in place as of July 11, 1994, and no payments to creditors have been made since November 14, 1997. We cannot assure you that a court will not interpret our obligation to include payments to the disbursement account from royalties earned from subsequent licenses of the server-based technology or licenses that we secure in the future, or that our current technology will not be deemed derivative of our technology existing at July 11, 1994. Consequently, we cannot assure you that we will not be required to repay creditors referenced in the bankruptcy proceedings the full amount of our liability, which is approximately $2,230,000, and interest on any payments that a court deems to be owed based upon a ruling that our interpretation is wrong. In addition, we cannot guarantee you that a creditor will not assert a claim for payment out of the royalties from subsequent licenses of the server-based technology. Such claims could be costly and time-consuming for us. If any of these events takes place, it could have a material adverse effect on our business, financial condition and results of operations. OUR FAILURE TO MANAGE EXPANDING OPERATIONS COULD ADVERSELY AFFECT US To exploit the emerging server-based software market, we must rapidly execute our business strategy and further develop products while managing our anticipated growth in operations. To manage our growth, we must: o continue to implement and improve our operational, financial and management information systems; o hire and train additional qualified personnel; o continue to expand and upgrade core technologies; o effectively manage multiple relationships with various licensees, consultants, strategic and technological partners and other third parties. We cannot assure you that our systems, procedures, personnel or controls will be adequate to support our operations or that management will be able to execute strategies rapidly enough to exploit the market for our products and services. Our failure to manage growth effectively or execute strategies rapidly could have a material adverse effect on our business, financial condition and results of operations. COMPETITION FOR KEY MANAGEMENT AND OTHER PERSONNEL IN OUR INDUSTRY IS INTENSE, AND WE MAY NOT BE SUCCESSFUL IN ATTRACTING AND RETAINING THESE PERSONNEL Our success and business strategy is dependent in large part on our ability to attract and retain key management and other personnel. Such individuals are in high demand and often have competing employment offers. In particular, our success depends on our ability to retain the services of Mr. Walter Keller, our President and Chief Executive Officer, and Ms. Robin Ford, our Executive Vice President of Marketing and Sales. We have entered into employment agreements with these individuals that each contains non-competition and confidentiality covenants. We currently anticipate the need to attract additional sales, marketing, financial and software engineer personnel in the near future. Competition for such personnel in the computer software and services industry is intense, and therefore, we cannot assure you we will be able to attract or retain such personnel. The loss of the services of one or more members of our management group or the inability to retain or hire additional personnel as needed may have a material adverse effect on our business. THE MARKET IN WHICH WE PARTICIPATE IS HIGHLY COMPETITIVE AND HAS MORE ESTABLISHED COMPETITORS The market we participate in is intensely competitive, rapidly evolving and subject to technological changes. We expect competition to increase as other companies introduce additional competitive products. In order to compete effectively, we must continually develop and market new and enhanced products and market those products at competitive prices. As markets for our products continue to develop, additional companies, including companies in the computer hardware, software and networking industries with significant market presence, may enter the markets in which we compete and further intensify competition. A number of our current and potential competitors have longer operating histories, greater name recognition and significantly greater financial, sales, technical, marketing and other resources than we do. We cannot assure you that our competitors will not develop and market competitive products that will offer superior price or performance features or that new competitors will not enter our markets and offer such products. We believe that we will need to invest increasing financial resources in research and development to remain competitive in the future. Such financial resources may not be available to us at the time or times that we need them or upon terms acceptable to us. We cannot assure you that we will be able to establish and maintain a significant market position in the face of our competition and our failure to do so would adversely affect our business. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are not exposed to financial market risks from changes in foreign currency exchange rates or changes in interest rates and do not use derivative financial instruments. A substantial majority of our revenue and capital spending is transacted in U.S. dollars. However, in the future, we may enter into transactions in other currencies. An adverse change in exchange rates would result in a decline in income before taxes, assuming that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, such changes typically affect the volume of sales or foreign currency sales price as competitors' products become more or less attractive. PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Reference is made to note 5 to the unaudited financial statements comprising a portion of this report. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. During the three-month period ended September 30, 2000, we granted options to purchase 19,500 shares of our common stock, at $4.81 per share, to several of our employees. The options generally vest in three years and they expire in ten years. We also granted five year warrants to purchase 300,000 shares of our common stock, at an exercise price of $5.25 per share, to two unrelated parties for services. These options and warrants were granted in a transaction not involving a public offering in reliance on the exemption provided by Section 4(2) of the Securities Act of 1933 for transactions by an issuer not involving a public offering. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits Exhibit 27.1 - Financial Data Schedule. (b) Reports of Form 8-K. We filed no reports on Form 8-K for the three-month period ended September 30, 2000. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GraphOn Corporation (Registrant) Date: November 14, 2000 /s/ Walter Keller By: _________________________________ Walter Keller, Chief Executive Officer and President (Principal Executive Officer) Date: November 14, 2000 /s/ William Swain By: _________________________________ William Swain, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 6,849,900 7,906,500 2,618,500 100,000 0 17,761,500 1,366,800 441,000 25,236,500 2,056,600 0 0 0 1,500 23,178,400 25,236,500 6,376,700 6,376,700 700,400 700,400 9,850,100 0 0 (4,535,200) 800 (4,536,000) 0 0 0 (4,536,000) (0.32) (0.32)
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